China holds third plenary session: Why real estate is not the main focus

BEIJING — China’s real estate problems may be serious, but analysts expect the upcoming third plenary session to focus on other areas, such as high levels of local government debt and promoting advanced manufacturing.

The highly anticipated policy conference, scheduled for Monday through Thursday, is a mega gathering of China’s Communist Party’s top brass that usually takes place only once every five years. The plenary session was widely expected to take place last fall but was postponed.

“The main challenge facing Beijing is to find an alternative fiscal system, as its current one, which relies heavily on land sales, is under severe pressure due to the sudden fall in the land market,” Larry Hu, chief China economist at Macquarie Bank, said in an email to CNBC.

Hu expects next week’s meeting to focus on fiscal reform and other structural policies. Cycle policies, which could also include real estate policy, are typically discussed at more regular meetings such as the Politburo meeting scheduled for late July, he said.

“In addition, policymakers should [their] “It’s about innovation, the so-called new productivity,” Hu said, referring to Beijing’s push to support advanced manufacturing and high-tech industries.

The Communist Party of China’s Central Committee is made up of more than 300 members, including full members and delegates, and typically holds seven plenary sessions each five-year term.

The Politburo is a group of about 24 people within that committee.

The Politburo Standing Committee is made up of seven key members and is China’s highest body of power, led by Xi Jinping, General Secretary of the Communist Party of China and President of the State.

The Third Plenary Session has traditionally focused on economic policy. In 1978, under the leadership of Deng Xiaoping, the conference officially heralded major changes for the communist country, including China’s “reform and opening up.”

“What I’m paying the most attention to is the so-called financial reform” at next week’s meeting, Dan Wang, chief economist at Hang Seng Bank of China, told CNBC.

She will also be looking at details on banking sector consolidation, as well as policy signals on local government finances and taxes.

“The real estate market is already [in a] Show that everyone is in agreement [on]”The economy is on a downward trend. We haven’t reached bottom yet,” Wang said.

The real estate sector’s problems are linked to the wealth of most Chinese households, but they are also intertwined with local government finances and their mountains of hidden debt.

Local governments used to rely heavily on land sales for revenue.

“In the medium to long term, developing sustainable revenue sources will become increasingly important for local governments,” HSBC analysts said in a June 28 report previewing the third Central Committee plenary session.

“For example, expanding the scope of direct taxes on consumption, personal income and wealth is often considered as a solution. Among these possibilities, a consumption tax may be the most effective,” the analysts said, noting that a consumption tax could provide an incentive for local governments to increase consumption.

But it’s not always easy to boost sentiment. In the weeks leading up to the meeting, Chinese stocks have neared correction territory, falling more than 10% from recent highs.

“Given low private sector confidence, we believe the transition now needs to be carefully planned and executed, otherwise it could work against a supportive fiscal stance,” HSBC analysts said.

The attempt to address a wide range of financial risks has prompted further regulation across the banking and finance industry. Since the latest Central Committee was installed in October 2022, the Chinese Communist Party has established new committees to strengthen oversight over finance and technology.

“The scale of real estate has become so large that it is absorbing all of China’s resources,” Yao Yang, professor and director of Peking University’s China Center for Economic Research, said last month, according to a speech translated into Chinese by CNBC.

In his view, excessive growth in the financial sector is behind the hollowing out of the US industrial sector.

“For China to compete with the U.S., it needs to develop manufacturing and technology,” Yao said. “As a result, it has to rein in its financial industry, including real estate. This is the fundamental reason for the increased regulation of both real estate and finance.”

Average wages at brokerages, which affect about 0.1% of China’s urban population, will fall by about 20% in 2022 and also fell slightly last year, Goldman Sachs analysts said in a report last month.

Combined with a much bigger impact from tighter local government finances, the fiscal and public sector wage cuts will drag down urban wage growth by about half a percentage point each year in 2022 and 2023, the analysts found.

Separately, China is reportedly planning to cap annual salaries in the finance industry at around 3 million yuan ($413,350), a cap that would be applied retroactively and require workers to give back excess earnings to their companies, the South China Morning Post reported last week, citing people familiar with the matter.

China’s State Financial Regulatory Authority did not immediately respond to CNBC’s request for comment.

An official statement from Beijing on the third plenary session said leaders would discuss “comprehensively deepening reform and advancing China’s modernization.” The statement noted China’s goal of building a “high-standard socialist market economy by 2035.”

In 2020, the Chinese government said such “socialist modernization” would include a per capita GDP of a “moderately developed country,” an expansion of the middle-income class, and narrowing disparities in living standards.

That will be no easy task, especially after the shock of the COVID-19 pandemic and rising geopolitical tensions. China’s per capita GDP last year was $12,174 in U.S. dollars, less than one-fifth of the U.S.’s $65,020, according to the World Bank.

Income inequality is a global issue, but Chinese people are significantly more depressed by their perception of “unequal opportunity,” according to a new survey conducted since 2004 by a team led by Martin King-White of Harvard University and Scott Rozelle of Stanford University.

The latest survey found that more respondents, regardless of income bracket, believe their family’s financial situation will be worse in 2023 than it was in the previous year.

“An economic slowdown means fewer opportunities, which may lead to more concerns about inequality and fairness than before,” the Big Data China survey summary said. “In other words, inequality may be more acceptable when the pie is growing rapidly, but when the economy stagnates, inequality becomes less acceptable.”